A shopper selects fresh produce from a market stall in the Kingston area of London, UK, Monday, May 20, 2024.
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LONDON – UK inflation may be on the verge of reaching a major milestone, with some predicting that the sharp decline in April's edition will take the headline rate below the Bank of England's 2% target.
Economists say that would represent a decline from the current level of 3.2% and could “make or break” a rate cut in June.
This decline will be largely driven by the energy market, after the cap set by regulators on household electricity and gas bills fell by 12% at the beginning of April.
A reading below 2% on Wednesday would be the lowest headline inflation rate since April 2021, and a cooling from the peak of 11.1% reached in October 2022 – when price rises in the UK were among the steepest among all advanced economies.
The country has been exposed to a range of inflationary pressures, including a persistently tight labor market, a weak currency making imports more expensive, and sharper rises in gas bills than seen elsewhere.
“very important”
Ashley Webb, a British economist at Capital Economics, said that if the headline rate fell below 2% in April, as he expects, it would be “critical.”
“This will be crucial in determining whether the first rate cut from 5.25% will happen in June (as we expect) or in August. What is more important is what happens next. We believe inflation will fall further, perhaps even to 1.0% later.” “. This year, Webb said in a note Friday.
A Reuters poll of economists puts the headline estimate slightly higher at 2.1%.
The Bank of England held interest rates steady at its May meeting, as policymakers sent signals they were preparing to cut rates in the summer, but they fell to zero in June – as did the European Central Bank.
Bank of England Governor Andrew Bailey said the latest figures were “encouraging”, but releases ahead of its June 20 meeting, including two CPI editions and two sets of wage growth data, would be crucial.
Bank of England Deputy Governor Ben Broadbent said in a speech on Monday that if inflation continues to move in line with expectations, it is “likely that the bank rate will be cut at some point over the summer.”
As of Tuesday, money market prices continued to point to only a 50% chance of a June cut, rising to 73% in August.
Market overreaction?
Economists at ING see inflation coming in “around 2%” in April, but falling below that in May and remaining at that level through most of the remainder of the year. This is well below the Bank of England's forecast that the rate will be closer to 3% at the end of the year.
“If we are right, this should be a recipe for several rate cuts this year. We expect at least three cuts, which is a little more than the markets are pricing in. But in the very short term, there is still some uncertainty about services inflation,” he said. James Smith, developed markets economist at ING, said in a note Monday.
The latest inflation reading for March showed that the core figure, which excludes energy, food, alcohol and tobacco, was 4.2%. Services inflation, a key measure for the Bank of England, is at 6%.
Services inflation is expected to reach 5.5% for April.
Jane Foley, head of FX strategy at Rabobank, told CNBC via email that there was a possibility the market would “overreact” to Wednesday's lower headlines.
“Both the core inflation figure and services inflation could have more significance for the timing of the first rate cut in the cycle. Assuming services inflation remains high, the bank could play a cautious role and continue to postpone a rate cut until August,” Foley said.
